Leasing companies are typically highly profitable businesses, and most companies which lease the equipment – lessees – believe that they are getting a sweetheart deal. Both things can’t be true and the fact is that most lessees pay more for leased equipment than they expect – or even realize. The typical lease versus buy analysis performed by lessees assumes that the only cost of leasing is the regular-term committed payments and does not include any additional costs. This view of equipment leasing is driven largely by the assumption that the lessee can and will return all of the leased gear on time at the end of lease with no additional costs. If that were so, most leases would always be a darn good deal. However, returning equipment is frequently much more difficult than expected leading to extensions and other costs.
Consider a typical 3 year IT lease for 300 laptops. Ask yourself – if the lessor were to receive all 300 laptops back on time at end of lease and were to be only paid the regular term rents, how can the lessor earn a profit? Given the low residual values of IT gear –it would be very hard for any leasing company to make money if all the equipment leased to clients was returned by their clients on time per the contractual requirements at end of lease term. Leasing companies would be “getting killed.” But leasing companies are typically very profitable businesses …
Over and over again we hear from lessees that their leasing company sales person claims to be going broke because the leasing company keeps making concessions to the lessee. Quotes include “I cannot believe that the credit committee approved this deal” and “If all my clients were as smart as you we would not make any money.” But the favorite and most common expression we hear repeated is “You’re killing me on this deal”. In our experience most companies that believe the line “you’re killing me on this deal” are in fact getting a great lease rate factor but in the end up paying far more than they expected for their leasing programs.
When companies examine the all-in cost of leasing, they are commonly shocked. If your firm is not measuring the all-in cost, but is leasing large amounts of equipment over many years – you are almost certainly spending too much on leasing and are overlooking a significant savings opportunity.
Conclusion: When the deal seems too good to be true and when you hear “You are killing me on this deal” your antenna should go up. It’s time to evaluate the all in cost of your leasing arrangements. Someone may be getting killed – do an all in cost of leasing analysis to determine who it is.
